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OECD: Estonian government should reconsider its pension reform

The OECD is warning that the government's planned pension reform could increase the risk of old-age poverty.
The OECD is warning that the government's planned pension reform could increase the risk of old-age poverty. Source: Martin Dremljuga/ERR

The Organisation for Economic Co-operation and Development (OECD) is forecasting 3.2 percent economic growth in Estonia in 2019, and is advising the Estonian government to rethink its planned pension reform, as allowing people to withdraw their second-pillar pension savings, if fully implemented, runs the risk of aggravating the problem of old-age poverty.

According to the OECD's latest forecast, economic growth in Estonia is projected to slow from 3.2 percent in 2019 to 2.2 percent in 2020 and 2021.

Consumer prices, meanwhile, are expected to increase 2.2 percent this year and 2.3 percent next year, while unemployment will reach 5 percent this year and 5.1 percent next year.

The OECD said that Estonia's exports have been hit by weak global demand. Consumption is project to hold up despite slowing real wage growth, as household finances are strong after years of increasing real wages and employment.

"The government's plans to allow individuals to opt out and withdraw savings accumulated in the mandatory private individual pension scheme should be reconsidered," the organization warned. "A significant share of households, notably those with relatively low incomes and a high propensity to consume, are expected to tap into pension savings, supporting consumption from 2021, but this risks feeding macroeconomic volatility in the short term and increasing old-age poverty from already high levels in the long term."

Neighbors' economic growth forecasts

In line with the latest OECD forecasts, Latvia's GDP is expected to increase 2.3 percent this year and 2.5 percent next year, compared to a 2.7 percent growth each year cited in the previous forecast published in May.

Latvia's consumer price index (CPI) is expected to grow 2.9 percent this year and 2.3 percent next year, while unemployment is expected to hit 6.4 percent this year and next year alike.

Lithuania, meanwhile, is expected to see the sharpest economic growth in the Baltics — 3.6 percent this year and 2.5 percent next year. Inflation is set at 2.3 percent this year and 2.2 percent next year, while unemployment is to hit 6 percent this year and 5.9 percent next year.

The world economic growth forecast has  been set at 2.9 percent this year and next, with global economic growth slowed down by growing trade conflicts, a weak business investments environment as well as political uncertainty.

Commerce chamber, employers likewise concerned

Likewise concerned, the Estonian Chamber of Commerce and Industry and the Estonian Employers' Confederation (ETTK) submitted an opinion to the Riigikogu in which they highlighted significant societal risks that would accompany the implementation of the pension reform as planned.

According to the bill, people who have joined the second pension pillar will be able to start using assets meant for old-age pensions at a time suitable for them prior to retirement age, however, this cannot be done by those who only have first pension pillar rights.

"Consequently, it is necessary to analyze the compatibility of the amendment with the constitutional principle of equal treatment, as some people will receive some of their social tax contributions for use but others will not," the chamber and ETTK said.

According to the bill, people whose accumulated assets exceed €10,000 cannot receive their money in a lump sum, but rather in three payments to be distributed across a one-year period. As leaving the second pillar could result in changes in the value of the assets within the pillar, the chamber and ETTK estimate that there is a risk that the assets of those who have accrued more money will decrease before they have the opportunity to retrieve.

Other countries' experiences and studies show that most residents would retrieve their savings from the second pillar if presented with the opportunity, especially in situations where various financial difficulties emerge. Assuming that most assets in the second pillar are retrieved, the pension system will become unsustainable and result in reduced investments and an increase in the tax burden, the opinion sent to the Riigikogu highlights.

"Making the second pillar voluntary will thus limit investments in Estonia by pension funds," the chamber and ETTK warned. "For example, LHV and Swedbank are already changing their principles regarding investments in Estonia thus far, and as a result, the financing sources of Estonian companies will change as well. Money collected in funds helps direct investment in local businesses, thus creating new jobs and contributing to economic growth."

According to current plans, most changes involved in the pension reform would take effect beginning January 2021. Applications for joining or leaving the second pillar should be open beginning next summer.



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Editor: Aili Vahtla

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